Benefits September 21, 2012

Pension Fears Prompt Surge of Retirements at Ill. Universities

September 21, 2012 (PLANSPONSOR.com) – Worries about looming changes in the state’s beleaguered pension system have prompted a surge in retirements across Illinois’ public universities.
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The St. Louis Post-Dispatch reports that in some instances, retirement rates have doubled as longtime faculty and staff members have rushed out the door in time to lock down pensions, based on current payout levels. The shrinking labor forces are creating, at a minimum, temporary staffing headaches. And in other cases, they are forcing schools to increase class size and reconsider the services they offer.  

“The state has dug an $85 billion hole in the pension system. It may take 30 years to get out of it,” said Glenn Poshard, president of Southern Illinois University, according to the news report.  

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The university’s campuses in Edwardsville and Carbondale have witnessed substantial increases in retirements. The Edwardsville campus saw 115 employees to leave this year, compared with an average of 74 who have retired over the previous three years. At the university’s Carbondale campus, 294 employees took retirement this year, compared with an average of 130 over the previous three years.  

“There are real concerns that they are going to lose the benefits they’ve worked so long for,” Poshard said.

The newspaper said what makes the losses on both campuses particularly tough is the fact that the schools are in the midst of a three-year hiring freeze as they cope with state cuts in higher education spending. That means most of the early losses will have to be absorbed on campus.  

The University of Illinois at Urbana-Champaign also has seen a spike in retirements, losing 464 employees. Typically, the school loses around 220 a year. For now, it is coping with the loss of veteran professors by hiring part-time adjuncts and retirees, but that is only a stopgap measure while the school completes the hiring of new full-time faculty members, spokeswoman Robin Kaler told the St. Louis Post-Dispatch.  

So far, there’s been nothing close to an agreement on how to close the $85 billion gap between the state retirement system’s assets and obligations—which has helped Illinois earn one of the lowest credit ratings in the nation. Lawmakers do not yet have a plan to fix it and are not expecting to take up the issue until after the November election.
Benefits September 20, 2012

Employers Need Incentives to Offer Retirement Plans

September 20, 2012 (PLANSPONSOR.com) – During a Senate Committee on Health, Education, Labor and Pensions’ roundtable, witnesses agreed business owners need incentives to offer retirement plans.
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Senator Tom Harkin (D-Iowa), chairman of the Committee, began the roundtable discussion, “Pension Modernization for the 21st-Century Workforce,” by saying that the defined benefit (DB) pension crisis is underreported. Today only about one in five people have pension plans, whereas one in two had these plans 30 years ago.   

Harkin recently released a report titled “The Retirement Crisis and a Plan to Solve It.” The heart of his plan is a new system of privately run hybrid pension plans, which incorporate many of the benefits of traditional pensions while substantially reducing the burden on employers (see “Harkin Retirement System Proposal Gets Mixed Reviews”). Harkin’s proposal requires that individuals who are not covered by an employer-sponsored retirement plan be automatically enrolled in regulated, privately run retirement funds.   

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David Madland, director of the American Worker Project, Center for American Progress, said during the roundtable that Harkin’s proposal is a good tradeoff because it functions like a defined contribution (DC) plan for employers, but like a defined benefit (DB) plan for employees.   

Harkin asked witnesses what the pension system should look like to meet the challenges of the global economy and provide security for working Americans.   

Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce, said the Chamber believes a successful private retirement system is voluntary, flexible and innovative.

Jim Davis, owner of Iowa Title and Realty, told the committee that he thinks employees should be required to fulfill one year of service at their companies before being eligible for a pension plan. Providing a longer time period before eligibility provides employees an incentive to stay at a company, which Davis said is preferable for small-business owners to retain employees.   

“We need to give business owners a reason to offer [a plan],” said Susan Breen-Held, consulting actuary at Principal Financial. Some incentives might be to increase compensation limits, or either raise or remove compensation limits for five years when the plan is first established, she said. In addition, she suggested lowering the administrative cost for small businesses by reducing some testing requirements from annually to every three years—or for very small plans, exempting them completely from testing.   

Harkin said his proposal takes the administrative burden off of employers, which Davis agreed makes it easier for employers to offer a benefit.   

Breen-Held told the committee that DB and DC are both important sources, and the soundest way to provide adequate retirement benefits is not through one plan type but looking at the system as a whole through strengthening each part of the system.   

“I’m not sure that we believe that the system is broken today,” she said. “I think that what you have is a very firm foundation … Is it perfect? No, but I do believe that it provides a starting place so that we can look at what’s working, what’s not working and learn lessons and build on those lessons…”   

The lessons learned are that a voluntary system must be simple to operate, and it must give employers more tax incentives to offer these plans. In addition, employees must understand the value of the plan and of having an annuity, she said.

Wong agreed that decreasing complexity, as well as unnecessary regulatory burdens, is crucial for business owners to adopt a pension plan. Policymakers can take several steps to encourage sponsorship of DB plans, she said. Streamlining notices and disclosures is one way to simplify the system. In addition, electronic delivery would be “extremely helpful” in eliminating administrative burdens and providing employees vital information, she said.   

Wong said the Chamber urges the Treasury and Internal Revenue Service (IRS) to set forth a clear and rational approach to Pension Protection Act (PPA) compliance for Pension Equity Plans. “More broadly, because of the complexity of hybrid plans and their regulation, additional guidance is critical to ensure that plan sponsors have enough clarity and flexibility to adopt and maintain hybrid pension plans with legal certainty,” the Chamber said in a statement.   

Separately, the American Benefits Council issued a statement with their recommendations, saying it strongly supports the current tax incentives for retirement plan contributions.   

“Some have suggested fundamental changes to the tax treatment of retirement plans, and 401(k) plans in particular, but such proposals are seriously flawed and could be fraught with unintended consequences — especially for those with lower incomes, who find it the most difficult to save,” James A. Klein, president, said in the statement.  

To forge a retirement system for the future, the Council suggested a number of improvements to manage risks, reduce costs, eliminate administrative burdens and improve coverage including:  

  • Promoting financial and investment education;  
  • Encouraging electronic communication and disclosure;  
  • Providing fiduciary safe harbors for plan sponsors;  
  • Facilitating flexible retirement strategies and plan designs;  
  • Continuing to stabilize funding obligations; and 
  • Conducting a thorough review of pension insurance premiums.  

 

Complete statements from the roundtable are available on the Committee’s website at http://www.help.senate.gov/hearings/.

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